Category: Family Offices

Inheritance Tax
Family OfficesIndirect TaxInheritance TaxReal Estate

Number Of Retail Investors Seeking IHT Advice Set To Rise

Advisers highlight expected increased use of flexible IHT solutions for clients

More than three out of four (78%) financial advisers expect the number of retail investors seeking help for IHT planning to increase over the next three years, according to new research from TIME Investments, which specialises in tax efficient investment solutions.  The findings come as IHT receipts hit a record £5.2 billion in 2017-18 despite the introduction of an additional nil-rate band.

Six out of ten (63%) advisers also predict an increase in the number of IHT products and investment solutions to be launched in the UK.  However, whilst this will offer more choice to investors, it also comes with a health warning – 88% of advisers questioned are concerned that new products will be launched by firms that don’t have the appropriate track record and/or expertise.

Two thirds of advisers predict an increase in the use of Business Relief (formerly known as Business Property Relief) over the next three years to help people reduce their IHT liabilities.  To encourage investors to support UK businesses, the Government allows shares held in qualifying companies that are not listed on any stock exchange and some of those listed on AIM to qualify for Business Relief. This means that once owned for two years, the shares no longer count towards the taxable part of an inheritable estate and are free from inheritance tax at point of death.

The accessibility of Business Relief investments and the range of investment opportunities available help to provide flexibility in IHT planning.  Three quarters of advisers felt that the increasing use of Power of Attorney due to rising dementia rates would contribute to the growth in the use of these flexible IHT solutions.

Henny Dovland, TIME Investments’ IHT expert comments: “The number of families in the UK being caught in the IHT net is increasing.  This represents a significant opportunity for advisers specialising in IHT and intergenerational planning and is reflected in our findings that reveal more specialist products are set to be launched in this market. However, care needs to be taken to ensure any new solutions are fit for purpose.  Our specialist team has a track record of over 22 years in this complex area.”

For further information on TIME Investments and its range of products, please visit www.time-investments.com

Man About Town
Family OfficesWealth Management

Man About Town

Founded by Andrew Heiberger in 2010, Town Residential has cemented its position as New York’s foremost luxury real estate services firm with an exhilarating foundation and seamless execution of best-in-class customer service by an unparalleled team of more than 500 Representatives and professionals strategically located in ten prime Manhattan, Brooklyn and Queens locations.

Town Residential boasts a unique fully integrated luxury real estate platform and specializes in luxury residential sales; leasing; the marketing, sales and leasing of property developments; commercial and retail. With uncompromising principles, Town Residential has established a new standard of excellence within the industry.

At all price-points, Town Residential implements a hand-crafted approach to the marketing of sale and leasing properties with unequalled distribution online and in print; through press and events; and industry syndication. Town Residential’s innovative platform extends beyond traditional print and digital exposure. We have cultivated strategic relationships and focused on events that provide our Representatives with personal access to thought leaders, trendsetters, and tastemakers.

Debra Stotts, licensed Real Estate Broker specializes in luxury property in New York City, with deep-rooted expertise in – and a passion for – the vibrant, international Midtown East neighborhood. Her credentials include unparalleled knowledge of the iconic, award-winning residential building, 845 United Nations Plaza.

Debra has consistently been a leading broker at Town Real Estate. With over $550 million in transactions, her success is the result of 25 years of experience, immersive market intelligence, a history of providing exceptional service, and – especially – the strength of the client relationships she has built on mutual understanding, respect, and trust.

Whether buying, selling, leasing, or managing, Debra’s focus is on her clients; her clear-headed guidance and tireless work ethic ensure that their goals – whether financial or personal – are achieved. She has been entrusted to transact real estate for investors around the globe and for families making their first home purchase, for foreign governments, relocating executives, international institutions, diplomats, downsizing empty nesters, and everyone in between.

Debra firmly believes that Midtown East offers the best value for a NYC investment – so much that she makes her own home here. Ask and she’ll tell you about the hot restaurants, the different parks, and where to go for the best artisanal pastries. She can tell you about the history of the international. Turtle Bay neighborhood and who’s lived there, about the stunning, protected views from 845 United Nations Plaza -and about its inner workings. Informed by her seven years as the onsite sales and leasing director, she knows the building intimately and firsthand.

Drawn to neighborhoods that, like Midtown East, offer nearby parks and water views – a respite from the city bustle – Debra previously worked in on-site sales for luxury properties in Battery Park. Prior to that, she built her real estate business helping to relocate United Nations Representatives to New York. Early in her career, in the days of luxury flying, Debra was a TWA flight attendant, a job she credits for instilling in her the value of providing top-quality, exemplary service.

A Manhattanite since she was in her early 20s, Debra raised her family and nurtured friendships here. From the tranquil early mornings to the rush of the workday to the throbbing pulse of the nightlife, she relishes the city’s changing energies. She enjoys the multi-cultural foods and experiences and the easy access to Broadway Theater, to the world’s best museums, and to Central Park. Debra especially cherishes the striking view from her own home, which overlooks the vast and varied East River.

10 Relationship Challenges in Family Businesses and Legacy Families
Family OfficesWealth Management

10 Relationship Challenges in Family Businesses and Legacy Families

At Aspen Consulting Team (ACT), we work with family businesses and legacy families as they walk the balance beam between love and money, socio-emotional wealth. Using a metaphor from the golf course—we go into the deep weeds and thicket of family dynamics and get the ball out to the short lgrass—so family members and their financial and legal advisors can move it forward. We work with family businesses and legacy families at the top 1% financial level.

The organizing principle in our consultation, including work with our colleagues David Bork and Dr. Will Bledsoe at Family Business Matters Consulting, is based on the Biblical message— build before the rain, from the story of Noah. There will be “rain” in a family business and a legacy family. We believe four pillars—alignment, boundaries, communication, and competence—provide a framework for building strategy, synergy and structure for managing the relationship challenges and conflicts in a family business and legacy family.

Over the years, we have worked for family businesses with 5 employees to over 15,000 employees and legacy families with $50 million to $5 billion in assets under management. At the ownership level, the relationship dynamics are very similar. It is first about trust, then alignment, boundaries, communication and competence at the ownership, family and management levels.

Recently, we helped a third generation (G3) family business transition to the fourth generation (G4). This involved the owners doing both strategic and succession planning for the business and establishing a Family Council. We have worked with several family businesses where there was a death by suicide of an heir. Helping these families understand and heal from such a tragedy was critical to their continued success.

How ACT helps families sustain and grow their wealth
Both psychological and economic theories frame our work. Our task is to resolve and restore breakage in relationships that block and prevent positive economic interaction, longevity and harmony in a family business and legacy family. The foundation of a good family is love and care, and the goal of a successful business is profit and return on investment. These can be in conflict in a family business and legacy family.

We define a family business as a company in which two or more family members hold a management, board or ownership position. We define a legacy family as a family unit or office that has $50 million dollars or
more in assets under management. Our work is influenced by six theories as we help families sustain and grow their wealth and at the same time, maintain personal and relationship harmony.

1. Love and money in a family business or legacy family are symbiotic and immiscible—they are connected but don’t mix together naturally. Love and money, what we call emotional economics, influences nearly everything in business and family relationships. There are no major emotional decisions without an economic dimension, and no major economic decisions without an emotional dimension. Pre-nuptial agreements are an example.

2. Family business and legacy family members must have “thick trust”. The first stage of psychosocial development is trust versus mistrust. We believe there are three types of economic trust. Exchange trust is the basic form, “trust, but verify”’, where we expect to be served and to pay for the meal we ordered. Mutual trust, “tit for tat”, is the most typical type of transaction in business, where we move in response to the first actor. Thick trust, long-term interactions and exchanges, is the only, but hardest, trust strategy for family members to avoid discord and have the advantage of effectiveness and speed. Negotiations are an example.

3. When emotions compete with economics, both lose. In many important decisions, the emotional tail can wag the economic dog. The oldest part of our brain is the emotional system. It evolved long before our economic system to help us survive. When our emotional system works in a healthy and mature manner it will provide a positive guide to decisions, when it malfunctions in business and economic decisions it will derail productivity, profit and reputation. Succession is an example.

4. A healthy endowment effect can turn into an unhealthy entitlement effect if not managed. Nearly every parent wants to endow his or her child with special opportunities. There is a thin line between endowment and entitlement. Entitlement happens when endowment expectations are not clearly defined and managed and financial gifts enable negative behaviours. Addiction is an example.

5. Every generation must manage their ‘commons’. The Boston Common, the historical park in downtown Boston, is an example of what economists call “the tragedy of the commons”. After 200 years of commercial use by many, it was closed because of overuse by a few. Affluent families and family businesses must have agreements on how to grow resources, limit extravagances and avoid rivalries and feuds that divide and destroy the common assets. Family constitutions are an example.

6. Parents must identity, understand and manage the dynamics of equality and equity, the ‘fairness monster’, among their children. Equality is identical apportionment and exact division of quantity. Equity is justice tempered by ethics and division based on contribution and need. One illustration is how the turkey is carved at the dinner table. Equality would mean that everybody would get the same size and type (white/dark meat) of turkey. Equity would mean that the carver would divide the turkey according to needs and perhaps even wants. Balancing these two dynamics in a legacy family requires the Wisdom of Solomon. Gifting and distributions are examples.

How love and money are mixed for the best possible outcome for families, businesses, and individuals is where the rubber meets the road. Relationships follow predictable, evolutionary life cycles that can either create advantage or discord. For legacy families and family businesses to successfully grow, share and transfer financial assets and social values, attention needs to be given, equally and systematically, to wealth, interpersonal, spiritual and human capital, what we call WISH™ investments.

Family wealth has a history of not surviving beyond the 3rd generation, called “shirtsleeves to shirtsleeves”. Dr. John Ward, professor at Kellogg School of Management and co-founder of Family Business Consulting Group, Inc., conducted a study on family business succession. He found that only 30% of family companies survive through the second generation, 13% survive through the third generation and only 3% survive beyond the third generation. Less than 5% continue through appointment of a successor from the next generation.

In one effort to answer the question of why the transfer of wealth in an affluent family is so problematic, Roy Williams and Vic Preisser, authors of Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, interviewed members of families with net worth ranging from $5 million to over $1 billion. They asked questions about how the failed transitions of wealth differed from the successful ones. They found that the involvement of all family members in the decisions about the transition of wealth required both trust and communication skills, which helped avoid the dynamic of parents dictating the future to their children.

Conducting a quantitative assessment, Dr. Michael Morris, along with Roy Williams, Jeffrey Allen, and Ramon Avila, interviewed 209 family business owners from the second and third generations. Their report, “Correlates of Success in Family Business Transitions’” concluded that relationships within the family had the single greatest impact on the successful transition of ownership and wealth: The dominant variable in successful business transition appears to be family relationships. Family business leaders’ first priorities should be building trust, encouraging open communication, and fostering shared values among the family members.’

The work of Morris, Williams and Preisser reached the conclusion that the major causes of financial failure have more to do with psychological patterns in the family than with legal, financial or business planning. According to their research, 30% of legacy families are successful in transiting wealth, but 70% lose control of their assets.

• Success rate in legacy families (30%);
• Collapse in trust and communication in the family system (42%);
• Failure of parents to adequately prepare their heirs for creating and managing the wealth (17%);
• Lack of proper governance structure (8%); and
• Insufficient tax and legal planning (3%).

Both financial interest and interpersonal dynamics can be successfully managed when family leaders give systematic attention to the following four areas.

Alignment
Alignment in a family business and legacy family requires collaboration, coalition and movement to the same target. Family businesses are poised for long-term success when family members, owners, executives and employees have similar values and are united toward the same goals. The best companies are the best aligned. Strategy, purpose and organisational capabilities must be in sync. Without clear alignment family businesses are vulnerable. Even hairline cracks in the family business can widen and invite disaster.

On the one hand, family businesses are the source of family happiness; on the other hand, they can be the source of family heartbreak. Misalignment creates discord, tension and conflict. Alignment creates a process that reinforces the company strategy, increases family and organizational harmony and promotes accountability and profitability. Keep the focus on the business! Its success is what makes other things possible.

Boundaries
Like a Trefoil clover, family businesses have three components: the family, ownership and enterprise. Boundary skills determine how family members, owners, non-family executives and employees will interface for the advantage of the business. ‘Good fences make for good neighbours.’ Unclear boundaries are at the root of many of the problems in family business. Boundaries need to be clear and constantly maintained if they are going to do the job for which they were intended. In order to create and maintain good boundaries family business leaders must define roles, responsibilities and accountability for owners, managers and employees and methods for handling certain personal matters. Family members must not meddle in areas for which they do not have responsibility. When a business is large enough to hire family and non-family professionals, use outside advisors, and establish governing boards clear boundaries prevent conflicts of interest.

Communication
Communication is one of the recurring issues that owners and executives in family business identify as a major obstacle to productivity. In a business with more than 200 employees, about 14% of the working week is wasted because of poor communication between staff and management. In a family business, poor communication can turn into personal and professional conflict. It is a family’s ability to manage and resolve conflict that determines its maturity and emotional health. Communication is more than transmission of information; it is the interactional heartbeat of the organisation.

All communication is grounded in relationships. Unless we’ve been otherwise educated, most of us unconsciously enact styles of communication and conflict we learned in our families and carry them into the workplace. Whether it’s resolving relationship issues, confronting challenges, managing conflicts or planning for succession, effective communication skills guarantee that every situation will be addressed and resolved in a thoughtful, deliberate, constructive and comprehensive way. Clear, constructive communication must always be the goal.

Competency
Competence is about the maturity, fortitude and talent to be an effective leader and team member in the business and successful leader in the family. In a survey of directors serving on boards of family-owned businesses, only 11% reported that the company was effective at developing talent. From those making decisions in the boardroom to those carrying out the day-to-day operations, everyone contributes to the success of the business by knowing how to play his or her position at the highest level. You can’t afford people who are doing just OK. You need high performers.
Due to the unique and subtle connections in a family business, leadership and employment standards must be clearly defined, established, reinforced, and rewarded (or not) at every level in the company. This is critical in any succession plan and process. The family in business must understand sound business practice and how it is affected by family dynamics. Competency principles and procedures of leadership and employment improve the company culture.

Roles and responsibilities must be consistent with the company strategy and at the same time encourage every employee to have a personal feeling of ownership and investment, to think and act like a leader, and to give their best efforts. This entails attracting, training, retaining and rewarding talent, having the right people in the rights seats and the appropriate family members at the Family Council table.

MAPS for Men, A Guide for Fathers and Sons and Family Businesses (first person – Edgell)
MAPS for Men, A Guide for Fathers and Sons and Family Businesses (M4M) involves over forty years of studying male psychology and working with professional men, especially around the relationship between fathers and sons. I first presented a paper on this topic in 1995 at the Vienna Chief Executive Organization University.

Tom had a very successful career with a national business before starting his training firm. When Tom, who has a master’s in psychology, joined me at ACT, we decided we needed to work on our relationship before we worked with other fathers and sons on their relationships. M4M is one of the results. We are both a little intense and competitive, so it was an interesting and fulfilling process.

MAPS for Men is about how our relationships with our fathers shape much of our self-esteem and professional drive and how this impacts a family business. Interestingly, before writing M4M, I had never worked with a female CEO; since writing M4M I now work with two female CEOs.

Succession planning in a Family Biz
Succession in a family business is often the greatest challenge and it impacts many people, from family members to employees. We have been and are currently involved deeply in helping family business founders’ deal with what we call ‘succession anxiety’. David Bork, in his book, Family Business, Risky Business, identified the issue within a family business, “When succession is left to the whims of fate, the family’s empire begins to crumble under waves of emotion”. There are two succession paths, often walked at the same time, management succession and ownership succession.

On average, succession in a family company happens about every twenty years and can create a flood of anxiety, rumours and speculations. In the best of times, succession is a form of stewardship, where our legacy is not limited to what is accomplished in our lifetime, but extends in the hearts, minds and actions of those who follow us. One measurement, in the words of Ken Blanchard from his book, Lead Like Jesus: Lessons for Everyone from the Greatest Leadership Role Model of All Time, is “how well we have prepared others to carry on after our season of leadership influence is completed”.

The endgame and often the most challenging issue in a family business, is the process of transitioning ownership and management from one generation to another. Ivan Lansberg, co-founder of the Family Firm Institute and author of Succeeding Generations: Realising the Dream of Families in Business, emphasises the central problem, “the lack of succession planning has been identified as one of the most important reasons why many first-generation family firms do not survive their founders.” In our work, we address the father-son succession process in a family business as both a management and ownership issue.

Family financial, political and psychological anxieties can be roadblocks and barriers to succession development and execution. John Davis, an expert on family business management and lecturer at Harvard Business School, believes that family elders are appreciated for their wisdom, but not necessarily liked by all the relatives. “Leaders tell me that they have a gratifying but tough and often thankless job. Many successful family business leaders tell me that they spend half of their time working to address family and ownership issues and to maintain unity.”

It is a guarantee that tension will increase during what John Ward and Denise Kenyou–Rouvinez, in their book, Family Business Key Issues, call the “hot phase” of the succession process because of the intense work of combining emotions and economics. Customers, clients, non-family managers, financial institutions and family members can apply pressure. The tension can cause announcements, solutions and directions to be presented before issues are clearly defined and processed. How important decisions are handled and communicated will depend on the family and company culture developed over many years.
Relationships follow predictable stages that can either create advantage or discord. In healthy families, an endowment effect takes place the day a child is born, we give our children special emotional and economic attention simply because they are our children. When an adult child joins a family business this can carry over into the business in the form of an entitlement effect and a special position that can create tension in the family and the business.

Succession anxiety can come from many directions. The father-son team and their advisors, must manage not only the corporate process but also the relationship dynamics. A basic psychological rule is that the first thing to fall into a void, real or perceived, is anxiety. There are two types of anxiety. Normal anxiety, like fear, is essential to the human condition, proportionate to the threat, and disappears when the risk is adjusted or removed. Neurotic anxiety is unspecific, vague and attacks the core foundation of a person’s life.

Rollo May, a minister and one of the best known American existential psychologists, wrote in his book, The Meaning of Anxiety, “Anxiety is the apprehension cued off by a threat to some value that the individual holds essential to his existence.” Succession can be a time of anxiety, when a father is measuring how he lived his life and a son is planning how he will live his life. Spouses, siblings, children, employees and customers will often have an emotional and perhaps a financial stake in the process and outcome.

Working together in a family business can be a long trek of personal development and organisational transformation for a father and son. The succession hot phase can be like be a fork in the road or a mousetrap on a major highway. Relationship issues, like entitlement, parentage and nepotism, must be understood and managed. The primary skills needed, by both the father and son as they move through this process, are high trust and clear communication around ownership and management issues.

Succession benchmarks are driven by time. The first issue is the transition style of the founder/owner, the second is the selection of the next family business leader, (either family or non-family) and the third is in the task of transitioning resources and power to the next generation.

The first step in the transition and succession process is to define the retirement style of the founder/CEO to overcome a sense of impermanence and indispensability. Harvard Business School Professor, Dr. Jeffrey Sonnenfeld, interviewed executives from over thirty of the best-known corporations for his book, The Hero’s Farewell: What Happens When CEOs Retire. He concluded that many chief executives become like folk heroes within their organisation and depart (or not) in four ways.

• Monarchs – who do not leave until they are forced out or die
• Generals – who leave only when forced out, but plan a return to power
• Governors – who rule for a defined term, then pursue other ventures and interests
• Ambassadors – who leave willingly, then returns to a high advisor role

It is naturally tempting, but simplistically dangerous, for founding parents to direct, or coerce, their children into the family business or for children to assume a role in the business without maturity and autonomy. Every founder/parent needs to do a realistic assessment of what the business permanence, its economic potential, governance structure and management systems, would look like with one of more of his or her adult children in control.

Many younger generation members grew up in the business, doing summer jobs and listening to business conversations at the dinner table. This does not qualify them for a serious management role in the company. While blood may be a qualification for entry into the family business, adult children must have the following attributes in order to grow and succeed in the business. The founder parent is in charge of filling out the details on this list.

• Character: trust and communication
• Competence: education and performance
• Commitment: loyalty to the company and family
The question of when a family heir should start working in the family business is one we are often asked. There is no obvious answer. The life cycle between a family business leader and his or her adult child will have an impact on the decision.

Psychological development influences the business relationship between a father and son. John A. Davis, co-author of Generation to Generation: Life Cycles of the Family Business, earned a doctorate from Harvard Business School. Renato Tagiuri received his PhD from Harvard and completed the program in psychoanalysis at the Boston Psychoanalytic Institute, before teaching and writing extensively on the topics of management, leadership and family business.

Davis and Tagiuri used their business and psychological backgrounds to conduct a research project focused on the quality of the work relationship between a father and son. They identified and examined the respective life phases of the father and son based on Erik Erikson’s concept of life stages.
They concluded that the quality of the work relationship varies as a function of the respective life-stage development of the father and son. They presented their research in a paper entitled “The Influence of Life Stage on Father-Son Work Relationships in Family Companies.” At an early age, most sons admire and even worship their fathers. In a family business, this could be the beginning of a thirty-year journey resulting in the father also being the boss.

The successful long-term growth of a family business, as with every organisation, requires turning over power to a successor. Max Weber, the German sociologist, referred to this process as the institutionalisation of charisma and saw it as one of primary challenges of leadership.

Succession in a family business is a process not an event. In the best-case situations, it is a 3-5-year process, where a strategy is in place before the tension or crisis of transition. This requires a realistic assessment of the skill level of their candidates for handling the wealth or business, pragmatic discussion with all involved family members, practical involvement of senior management and balanced advice from outside legal, financial and business advisors.

The paradox is that only a few family companies give serious attention to the task of handing the business down to the next generation. Resistance factors can come from the founder, family owners, senior management teams and/or family members.

The second step of succession—outlining if, when and how a successor from the family will be the next leader—can be a time of celebration or challenge. The heir should be graded against these twelve ideal standards.
1. Innate interest in the business (pre-teens)
2. Natural leadership abilities in the family and school (teens)
3. Exposure and work in the company (late teens)
4. Excellent education and training experiences (early 20’s)
5. Apprenticeship in similar industry (middle 20’s)
6. Success in a comparable business (late 20’s)
7. Desire and commitment to join the family business (early 30’s)
8. Successful progression through different department (mid 30’s)
9. Senior managerial responsibilities (late 30’s)
10. Partnership with the company CEO (early 40’s)
11. Executive and personal leadership respect in the family and company (40’s)
12. Mature succession, the ‘de facto leader’ (mid 40’s)

It is important to determine the qualifications of the successors and to avoid the trap of an inadequate successor, from within or outside the family, such as the following persons.

• Good Son – a person with family loyalty, but limited leadership skills
• Loyal Servant – a conscientious helper, but impotent leader
• Watchful Waiter – a good performer, but with inadequate executive abilities
• False Prophet – a talented person, but with the wrong expertise
• White Knight – an exceptional leader, but with limited commitment to the business

The third step is to create a successful succession. In a family firm this will have four stages.
1. Owner-Management Stage – father is the only family involved in the business
2. Training and Development Stage – the son learns the business
3. Partnership Stage – father and son share percent of ownership and management
4. Power Transfer Stage – responsibilities and control shift to the successor

When family leaders and members work well together in the family and the family business, they can promote a level of leadership transition, company loyalty, brand commitment, long-range investment, effective decisions, rapid action and stewardship impact for which nonfamily businesses yearn, but seldom achieve.

Though we have been involved with many families at their most intense levels, we have never been fired from a case and only once left a case unresolved. The feedback we get is that we are genuine and pragmatic. As financial success increases in a family the relationship complexity and intensity also increases, thus we have worked with some clients over several years.

We are a small consulting firm in a mountain resort town. Professional relationships are key to our success and how to scale is always a challenge.

Company: Aspen Consulting Team, LLC
Name: Edgell Franklin Pyles, PhD Thomas Edward Pyles, MA
Email: [email protected]
             [email protected]
Web Address: www.AspenConsultingTeam.com
Address: Box 503, Snowmass, CO USA 81654
Telephone: Edgell +1 970-948-1415, Tom +1 303-518-3520

Strategic Governance for Family Offices: Why Do It and How to Approach It
Family OfficesWealth Management

Strategic Governance for Family Offices: Why Do It and How to Approach It

Amelia Renkert-Thomas, Co-founder of family business consultancy Withers Consulting Group, outlines the need for governance and the different approaches family offices can take to it, in partnership with the Family Office Association.

Governance, at its most basic, is a system for decision making. Every organisation, from single family offices to multinational businesses, needs some level of governance.

For a family office, effective governance has the following benefits:
– It promotes the shared purpose of the family and helps the office to achieve the family’s vision of success while acting in accordance with the family’s values;
– It can be scaled up or down in line with the complexity of the family, the assets, the clients and the services;
– It creates accountability and so ensures that the family office abides by relevant laws and regulations;
– The governance structure helps to manage risk and complexity while promoting efficient decision-making and transparency;
– The structure operates as designed even in times of extreme stress and conflict.

Many single family offices work effectively with natural governance, where informal decisions are made as and when they are needed. A family office without formal structures, written policies and procedures for making decisions does not lack governance. It simply uses the system of “the way we do things around here”.

Other family offices, particularly those which are more complex or change in a way that makes decision-making more difficult, require a more formal method to ensure that they operate effectively. The respective rights and responsibilities of three separate and distinct groups will need to be clarified. Each will see the family office from a different perspective, having its own needs and objectives:

– Clients look for the family office to provide appropriate investments and/or financial, reporting, tax and admin services. They are concerned about return on investment, timeliness, accuracy, compliance, privacy and risk management. Clients want to make sure that the cost of delivering these services is reasonable and fairly allocated among the various clients
– Members of the management group, who run the family office on a day-to-day basis, have much the same interests as other senior executives. They seek appropriate compensation with upside bonus potential, a safe, efficient and comfortable working environment, the right staff, equipment, third-party relationships and the budget to accomplish the work, the right balance of responsibility and authority, and opportunities for job and personal advancement

– Family members expect the family office to provide services in a way which supports, not hinders, the family’s shared purpose and promoted family legacy and values. They want the family office to make their lives simpler and to enable them to reach their own individual goals

There are simply not enough resources in family offices to satisfy all the wants and needs of each group. As a result, conflict at some stage or other is highly likely.

It doesn’t have to be damaging, though. The different perspectives, needs and objectives of each group can create the energy that, properly harnessed, will make the single family office more successful. The point is to design a decision-making or governance system that will promote optimal intra-group or inter-group decision-making to resolve conflicts effectively and achieve the strategic objectives of the family office.

Natural governance
Natural governance can be efficient and effective, particularly when a small group with common background, values and objectives work together. It is particularly common in smaller family offices where a charismatic individual founded the venture and controls it. But as the family grows and its structures become more complex, it can be very difficult to maintain a natural governance system. New employees, spouses and next gen family members don’t have the background, experience or tacit knowledge to understand ‘the way we do things around here’.

While nimble and adaptable, natural governance can be prone to catastrophic failure when circumstances change. Generally speaking, natural governance will fall short and a more formal governance system will be needed when a larger, more diverse group seeks to exercise joint control and decision-making over the family office. This situation typically arises as the family and the family office grow more complex over time.

Formal governance
Designing a more effective governance system for family offices is a four-step process:
1. Understand the Shared Purpose of the family
The Shared Purpose of a family is a combination of the family’s vision for the future, it’s plans for achieving that vision, and the individual life aspirations of family members, all shaped by the family’s values. No two families have the same Shared Purpose, hence the saying “If you’ve seen one family office, you’ve seen one family office”.

2. Understand the complexity of the family office
The more complex the family office, the more important formal governance will be. This is because the nuanced and unspoken rules that make up a natural governance system, will tend break down as multiple decision-makers try to make complex interlocking decisions. Decisions such as ‘how much liquidity should be maintained at all times?’ implicate management, clients and family; to be made effectively, will require balancing the short and long-term needs and interests of all three groups.

3. Determine appropriate governance structures and policies that suit the shared purpose and complexity
Governance structures and practices need to be formal enough to allow the family office, clients and family to make effective decisions about the assets being managed, but not so formal that decision-making bogs down. Generally, the more complex the family and its assets are, the more structure will be necessary.

4. Implement the new system, including feedback systems to ensure organised accountability
In an effort to design better governance, more than one single family office has adopted a handful of so-called ‘best practices’, written them up in a manual and thrown the manual on a shelf. Those family offices that follow this path are often surprised when conflict resurfaces and everyone in the system reverts to their old patterns instead of following the practices in the manual. ‘Best practices’ are a good starting point, but they are rarely specific or targeted enough to handle the particular circumstances that a family office finds itself in. If instead, family, clients and management have worked together to design a governance system that will fit the family’s Shared Purpose and the complexity of the family office system, the odds of success will increase.

For appropriately situated families seeking greater control and co-ordination over the management of their affairs, a family office can be a valuable tool. However, establishing a family office is only the first step of what should be viewed as an ongoing process, rather than a permanent fix. Much as you would never expect a ten-year-old child to fit into the shoes he wore when he was five, governance that was sufficient in a family office’s earlier years, can’t be expected to function effectively as it evolves and becomes more complex.

Reassessing the suitability of the family office’s governance over time, based on its ability to satisfy a family’s shared purpose and degree of complexity, is key to ensuring that a family office’s benefits are optimised. Designing effective governance requires an understanding of each family’s unique and changing circumstances, and a departure from the notion that ‘best practices’ are always best.

Bridging the Family Business Generation Gap
Family OfficesWealth Management

Bridging the Family Business Generation Gap

The results of new research by PwC, talking to more than 200 family members likely to take over family businesses in 21 countries worldwide, looks specifically at the issue of succession and how family firms prepare for these changes.

The report identifies three areas where a mis-match of styles, ambitions and plans could cause difficulties for UK family businesses which account for over 9 million jobs, around UK £80bn in annual tax receipts and nearly a quarter of
total GDP.

The generation gap

Henrik Steinbrecher, PwC global middle market leader, says: “The world has changed out of all recognition since the current generation took over, and the pace of change can only accelerate in response to global megatrends like demographic shifts, urbanisation, climate change and new technology.

“The handover for ‘first generation’ businesses – those making the transition from start-up venture to family firm – is commonly the most fraught. Of those taking over under these circumstances; 20% say they’re not looking forward to running the business, compared to 8% for respondents as a whole.”

The credibility gap

Bearing the family name can work against the next generation. 88% say they have to work harder than others in the firm to ‘prove themselves’. 59% consider gaining the respect of their co-workers is the single biggest challenge they face.

Promotion to CEO is no longer automatic for the next generation, with a growing number of family businesses being prepared to make tough succession decisions. The survey revealed that 73% said they were looking forward to running the business one day, but only 35% thought that was definite, and as many as 29% thought it at best only fairly likely.

The communications gap

There’s a tendency for some in the older generation to overestimate how well they have run the business, while underestimating their children’s capacity to do this as competently as they did.

Sian Steele, PwC partner and family business specialist in the UK, says:

“Members of the current generation often comment that their children aren’t sufficiently entrepreneurial and aren’t prepared to put in the long hours they did to build the business while, down the hall, their children are wishing their parents would embrace new technology and new ideas.

“This sort of impasse can slow down decision-making and lead to the phenomenon of the ‘sticky baton’, where the older generation hands over management of the firm in theory but in practice retains control over everything that matters.”

The survey reveals that as many as 64% think the current generation will find it tough to let go.

Steinbrecher concludes: “Firms that manage succession well are those that plan many years ahead – ideally, five to seven years in advance – accompanied by ‘sensible conversations’ that address roles, responsibilities, and timings.”

Download the full report at www.pwc.com/nextgen 

 

Service Delivery Trumps Offerings says Study
Family OfficesWealth Management

Service Delivery Trumps Offerings says Study

The Family Office Exchange (FOX) asked a select group of industry-leading advisors and sophisticated family office executives to identify the hallmarks of state of the art advice in various disciplines of family wealth management at the 2013 FOX Thought Leaders Council Summit.

The respondents reported that how services are delivered, rather than service menu, is the biggest differentiator for leading firms.

The report, titled “The State of the Art in Family Wealth Management,” identified the following as the hallmarks of state of the art wealth management:

– A tendency to ask why before asking how – State of the art advisors approach their work by first ensuring that they understand their clients’ goals

– Communication with the goal of understanding – State of the art advisors communicate strategically and proactively, anticipating their clients’ needs, with regular frequency, as well as responding to on demand requests

– Understanding how all the pieces fit together – State of the art advisors proactively understand the roles and strategies of the other advisors who are on the team and know how and where their strategies impact one another

– Promoting teamwork among advisors – State of the art advisors understand the value of teamwork and actively work to put it into practice in the way they work with their own staffs, with their clients, and with other advisors.

“Our primary intention with this report was to perform a gap analysis and identify the needs of ultra-wealthy that weren’t being met in today’s private wealth management industry,” says FOX Executive Director of Market and Content Development Amy Hart Clyne.

“Interestingly, the study revealed that there is not a services gap. It is how rather than what services are delivered that separates best practice from common practice.”